OPERATING BUDGET 2026-2027
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City of Rochester 2026-2027 Adopted Budget TABLE OF CONTENTS SECTION I -Transmittal and General Summaries Letter of Transmittal Adopted Budget Message Budget in Brief Recommended Budget Message City Council’s Budget Priorities Vision, Principles, and Priorities Mission Statement R.I.S.E General Summaries Summary of Means of Financing 2026 Summary of Budget by Fund and Character 2026 Budget Recapitulation of Expenditures 2026 Trend Data by Object 2026 Summary of Means of Financing 2027 Summary of Budget by Fund and Character 2027 Budget Recapitulation of Expenditures 2027 Trend Data by Object 2027 Frozen Positions SECTION II -Operating Expenditure Budget Details- All Funds -Operating Revenues- All Funds -General Fund City Council Mayor City Administration Communications and 311 City Clerk Elections Parking Ticket Collections Administrative Fines Finance City Attorney Human Resources Community Development Bold Forward Unbound DSIC & North Station Maintenance Information Technology
City of Rochester 2026-2027 Adopted Budget City Hall Maintenance Police Animal Control Dispatch Fire Community Development-Building Safety Flood Control Emergency Management Engineering Infrastructure Maintenance Administration Fleet Maintenance/PWTOC Building Traffic City Lighting Music Art Center/Civic Theater/125 Live Community Reinvestment Development Administration/Economic Development CBD Maintenance Joint Facilities Maintenance Unallocated Contingency General Fund -Library -Municipal Recreation System Park and Recreation Administration Recreation Tennis Swimming Pools Parks Parkway Landscape Maintenance Plummer House Regional Sports Complex F.E. Williams Golf Graham Arena National Volleyball Center Recreation Center -Mayo Civic Center -Airport Airport Operations US Customs
City of Rochester 2026-2027 Adopted Budget -Mass Transit Administration -EDA Administration -Parking -Sanitary Sewer Wastewater Utility Sewer Fund Debt -Storm Water Utility -Rochester EDA -Operating Revenue SECTION III -Internal Service Detail 2026 -Internal Service Detail 2027 -Internal Service – Revenues SECTION IV -Capital Improvement Budget – Summary 2026 -Capital Improvement Budget – Summary 2027 -Capital Improvement Budget – Revenues SECTION V -Debt Service Budget – Details 2026 -Debt Service Budget – Details 2027 -Debt Service Budget – Revenues SECTION VI -Decision Packages 2026 -Decision Packages 2027 SECTION VII -Additional Requested Decision Packages 2026 -Additional Requested Decision Packages 2027
City of Rochester 2026-2027 Adopted Budget SECTION VIII -Outside Agency SECTION IX -Outside Agency Applications SECTION X -Six Year Forecast Summary SECTION XI -Rochester Public Utilities Operating Budget SECTION XII -Rochester Public Utilities Electric Utility SECTION XIII -Rochester Public Utilities Water Utility SECTION XIV -Rochester Public Utilities Personnel Budget SECTION XV -Rochester Public Utilities Supplemental SECTION XVI -Capital Improvement Plan Airport Parks Golf Recreation Center Mayo Civic Center Streets Traffic Mass Transit Pedestrian Facilities Parking Sewer and Water Storm Water
City of Rochester 2026-2027 Adopted Budget Water Reclamation Flood Control Destination Medical Center Downtown Development/Tax Abatement District Fire Police Library Administration -Rochester Public Utilities Capital Improvement Plan Electric Water Appendix I -City Council Study Session Presentation – 9/15/2025 -City Council Study Session Presentation – 9/03/2025 -City Council Study Session Presentation – 8/25/2025 -City Council Study Session Presentation – 6/23/2025 -City Council Study Session Presentation – 4/28/2025 Other Supplemental Information -City Council Meeting Presentation – 12/01/2025
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City of Rochester 2026-2027 Adopted Budget Section I Transmittal, Budget in Brief, Recommended Budget Message, City Council’s Budget Priorities, General Summaries, and Frozen Positions
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City of Rochester 2026-2027 Adopted Budget City of Rochester, MN Letter of Transmittal
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December 2, 2025 Honorable Mayor and Council Members, On behalf of our entire organization, I am pleased to provide you and the Rochester community with the Adopted 2026-2027 Operating Budget and 2026-2031 Capital Improvement Program (CIP). The 2026 adopted budget is $693,371,371 (inclusive of Rochester Public Utilities) with the General Fund expenditures accounting for $137,571,464. The Capital Improvement Plan (CIP) accounts for $245,753,341 with the six-year CIP totaling $1.1 billion. The City’s other major funds are inclusive of the Enterprise, Special Revenue, Debt, and Internal Service Funds and Airport total $310,046,566. I am grateful for the City Council’s direction and support throughout the budget development process, as this budget was developed to lead Rochester toward addressing our city's most foundational and pressing needs. During their review, the City Council made the following revisions to the adopted budget which adjusted the Levy from the original recommended levy of $118,234,623 (a 5.9% increase) to the final adopted levy of $118,284,623 (a 5.95% increase). Below is a summary of material changes from the Recommended budget: We especially appreciate Rachel Houdek, Josh Duerr, Brian Anderson, Aaron Parrish, and the Leadership and Finance Teams' outstanding efforts in developing a budget that ensures we remain fiscally responsible while improving communication and aligning services with strategic priorities. We also thank the community as we continue to focus on making Rochester, MN, a place where everyone can enjoy a high quality of life. Sincerely, Alison Zelms, City Administrator Destination Medical Center (DMC) CIP $50k in Community Building for Outside Agency Addition of two police officers that were approved via RCA on June 16, 2025 (Mayo Funded) RPU: 2026 Retail Electric rate change: 6% to 4% RPU: SMMPA Wholesale Power rate change: (6.0%) to (10.0%) Result: Decrease to Retail Electric Revenues of $2.9M in 2026 and $2.7M in 2027 Result: Decrease to Power Supply costs of $3.9M in 2026 and $3.5M in 2027 The approved 2026-2027 budget remains focused on ensuring that every investment aligns with the City’s strategic priorities, delivers meaningful value to our residents, and supports operational investments grounded in financial stewardship for long-term financial and operational sustainability, while reducing the forecasted levy by almost half. Through collaborative efforts, we are committed to keeping the property tax levy focused on core services that maximize the objectives outlined in our planning documents, serving our residents, businesses, and visitors. This focus prioritizes various investments in facility maintenance, vehicle and equipment replacement, and staffing to meet and improve upon current service demands while also maintaining responsible practices to assure long-range financial stability. 2026 $693.4 million Operations $421.5 million Debt Service $26.1 million Capital Improvement Program $245.8 million City of Rochester Budget 2026, Inclusive of RPU City of Rochester 201 4th Street SE - STE 266 Rochester, MN 55904-3781 Phone: 507-328-2000 Fax: 507-328-2727 201 4th Street SE - STE 266, Rochester, MN 55904-3781 www.rochestermn.gov Phone: 507-328-2000 Fax: 507-328-2727 -1-
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ROCHESTERMN.GOV 2 This document is intended to provide you with information about your City’s budget process. Included in the Budget in Brief are totals for revenues and expenditures. Also included in the Budget in Brief are facts about the various departmental budgets. It is important to note that the City of Rochester is able to maintain its positive financial condition and AAA credit rating due to the fiscally responsible actions taken in the prior years and by prudently investing in service level enhancements as resources allow. The 2026 budget represents a financial commitment to the vital and necessary services that our residents and businesses depend on. It also continues some prior year cost reductions, while prioritizing necessary strategic investments for a growing city. The 2026-2027 budget is a third attempt at a two year budget. It is where budget priorities and an initial budget for both years is set. Budget in Brief Align resources with City Council strategic priorities Advance the City’s commitment to financial sustainability Prioritize both operating and capital expenditure The Goals of the Process are: Ensure sufficient revenues exist to deliver existing and proposed services and projects As a steward of taxpayer dollars, the City of Rochester, MN prides itself on providing transparency and accountability in its budget. Budget Process April City Council affirms Strategic Priorities, discusses budget priorities, and discusses factors influencing the budget August Team presents City Council with 2026 Recommended Operating Budget & CIP September Max Levy Set - Adopt Preliminary Budget & CIP December Public Hearing & Adoption April - August Budget Development August Finance Department Prepares Budget September City Council Reviews Budget Documentation and any Revisions to Recommended Budget November - December • City Council finalizes Budget and Capital Improvement Plan • Public Notification on Budget & Service Modifications -4-
ROCHESTERMN.GOV Budget in Brief 3 The 2026 adopted budget is $693,371,371 with the General Fund expenditures accounting for $137,571,464. The Capital Improvement Plan (CIP) accounts for $245,753,341 with the six-year CIP totaling $1.1 billion. The City’s other major funds are inclusive of the Enterprise, Special Revenue, Debt, and Internal Service Funds and Airport total $310,046,566. The inclusion of Rochester Public Utilities’ (RPU) budgets with all other City budgets is to ensure a comprehensive financial picture. It is included in the same document for the benefit of the Mayor, City Council, community, and Rochester team. 2026 Adopted Budget Budget Formula + = + Baseline Budget Service Modifications Capital Improvement Program Budget Rochester has received a Certificate of Achievement for Excellence in Financial Reporting for almost 52 years, the longest in the state of Minnesota. City of Financial Distinction The City of Rochester has a AAA Rating -5-
ROCHESTERMN.GOV Budget in Brief 4 Where the Money Comes From General Fund $137,571,464 Tax dollars are accounted for in the General Fund, along with license fees, permit fees, state shared revenues, interest income, miscellaneous revenues, and prior year revenue. This portion of the budget is comprised largely of discretionary funds, since the Mayor and City Council can allocate the funds to programs and services in any area. There are few restrictions on how these resources may be allocated. The City cannot use fees collected from services for discretionary use. General fund dollars are used to support such City services as police and fire, as well as streets, community development and administrative support services. Enterprise, Special Revenue, Capital Improvement Plan, Airport, Debt, and Internal Service Fund $555,799,907 The City of Rochester has a few different enterprise and special revenue funds. Enterprise funds are entirely funded through customer charges and do not require tax support. These include electric utility, water utility, sewer utility, storm water utility, and the parking fund. Special revenue funds are a combination of customer charges and taxes. These include: municipal recreation, library, and transit. 2026 Total Operating Revenue Inclusive of RPU As shown in the chart, the majority of funding for the City of Rochester budget comes from sources other than property taxes. Those taxes fund 17.1% of the total revenues. Items like charges for services, which are items like electricity, water, parking, and sewer fund the total budget by 41.2%. *Miscellaneous Revenues include: - Non Property Tax Debt Payment Revenue - Capital Improvement Program - Revenues In Lieu of Tax Enterprise Funds - Private funds - Fines, forfeits, and penalties -6-
ROCHESTERMN.GOV Budget in Brief 5 General Fund Revenue $137,571,464 2026 Property Tax $118,284,623 Property Tax Allocation for Median Home Value of $304,100 Property Tax In total, the City of Rochester receives $118.3 million from residential and commercial property tax. Residential property owners pay 54.9% of the levy, commercial property owners pay 33.6%, apartment complexes pay for 10.4% of the levy and other sources account for 1.1% of the total levy. Of the $118.3 million, 69.6% supports the General Fund, while 9.8% supports the Parks & Recreation department and 7.7% supports the Rochester Public Library. -7-
ROCHESTERMN.GOV Budget in Brief 6 Overall, the adopted 2026 budget includes expenditures in six major categories for all funds. The largest being the CIP at $245.8 million dollars. Approximately 24.5% of the City’s total budget is invested in Employee Services, with a total of $169.8 million dollars. This expense is for the City’s full-time and part- time employees, which allows the City of Rochester to deliver high quality services. Approximately 71% is related to salaries, while 29% is related to benefits. 2026 Adopted Budget of $693,371,371 • Music Art City/ Civic Theatre/ 125 Live • Community Reinvestment • Development Administration • Economic Development • Central Business District • Unallocated Contingency Where Does the Money Go? • Engineering • Street Infrastructure • Fleet Maintenance • Traffic and City Lighting General Fund Expense $137,571,464 • Police • Animal Control • Dispatch • Fire • Building Safety • Flood Control and Emergency Management Top 5 CIP Projects Employee Services 24.5% Contractual Services 22.5% Other Charges 14.3% CIP 35.4% Debt Service 3.8% Miscellaneous -.5% 35.4% 24.5% 22.5% 14.3% 3.8% -.5% • Mayor and City Council • City Administration • City Clerk • Elections • Administration Fines • Finance • City Attorney • Human Resources • Planning and Zoning • Information Technology • City Hall Maintenance Public Safety 57% General Gov. 17.4% Public Works 15% Other 10.6% -8-
ROCHESTERMN.GOV Budget in Brief 7 Vision, Principles, Priorities A representative sample of 635 Rochester residents were collected between July 19 to August 25, 2024. The margin of error around any reported percentage is 4% for all respondents and the response rate of the 2024 Community Survey was 15%. Survey results were weighted so that the demographics profile of respondents was representative of the demographic profile of adults in Rochester. 2024 Community Survey Results Community Vision Rochester is a City that cares. Where all people are treated with dignity and respect. Where residents, employees, and visitors enjoy a high quality of life. Where business and industry thrive, and where the land and environment are renewed and sustained for the benefit of all. It is a welcoming and diverse community. Renowned for its reputation as a center for growth and innovation. Characterized by its safe and friendly neighborhoods. Committed to health and wellness for its people. Connected both physically and socially. Dedicated to the sustainable and responsible use of public resources. Strategic Priorities We will focus our resources and initiatives to drive progress in these areas: Economic Resilience Housing Access Inclusive Growth Management Responsible Environmental Stewardship Transformational Capital Projects Organizational Vision A vibrant, compassionate, innovative team. Foundational Principles We will approach every action and decision through a lens of: Compassion Fiscal Responsibility and Sustainability Inclusive Decision-Making Public Safety Quality Services Social Equity -9-
ROCHESTERMN.GOV Budget in Brief 8 Rochester at a Glance Parks & Recreation is responsible for • 2,989 acres of parkland • 2,011 acres of additional public lands • 100 playground areas • 145 individual park areas to visit • Over 50 miles of trails and sidewalks Rochester Fire Department • Over 11,200 calls for service • Hired 7 firefighters in 2026 • Received 168 total applicants and conducted 126 interviews • Completed over 800 commerical inspections • Partnered with RPD at Safe City Nights Rochester Police Department • Responded to nearly 60,000 calls for service • Detectives investigated approximately 1,300 cases • Participated in more than 150 community engagement events Percent Change of Operating Indicators 1980 - 2024 Incorporated in1854 Square miles 57 Community Development Department • 32,842 Construction Inspections • 290 Planning Applications Reviewed • 441 New Housing Units • 14,266 Construction Permits Issued • 26,399 Housing Units Inspected • $1,158,039,275 In Construction Population 125,000* *Based on most recent demographers estimate Wastewater Utility collected and treated 4.12 billion gallons & beneficially reused 9.6 million gallons of biosolids as a natural soil amendment in 2025. -10-
ROCHESTERMN.GOV Budget in Brief 9 Library • 400,000 visits (4% increase from 2024) • 100,000 program attendees (9% increase from 2024) • Over 2.1 million items circulated (2% increase from 2024) Rochester Public Utilities • 858.9 miles of distribution lines and 42.5 miles of transmission lines maintained and serviced • 623.1 miles of water distribution pipes maintained and serviced • 70,702 customer calls (est.) • 16,406 walk ins (est.) • 6,200+ safety training assignments completed • Projected to meet annual energy savings goal of 1.5% of average retail sales (17,219,195 kWh) City Attorney (2025) • 576 gross misdemeanor cases • 2050 misdemeanors • 253 petty misdemeanor • 3,822 victims assisted • 35 civil cases City Clerk (2025) • Issued 1287 licenses in 2025 • Answered 1,149 requests for public data/records • Executed 825 contracts of behalf of the City • Processed 683 Resolutions and Official Acts Rochester Public Music presented 29 community events in seven parks, serving 25,000 residents and visitors, and 22 outreach programs for 4,500 elementary students and teachers in 2025. 311 • Answered over 40,000 calls • Processed over 18,500 Service Requests • Over 3,600 residents used Ask Chester • Processed over 2,300 voicemails Public Works • Maintain over 500 miles of streets and alleys • Annual mill and overlay project 19.3 centerline miles • Annual chip seal project 18.4 centerline miles • Blacktop patched 11,531 tons • Replaced 8,100 lineal feet of concrete curb • Swept 13,000 miles of curbline -11-
ROCHESTERMN.GOV Budget in Brief 10 City of Rcohester High Performance Organization (HPO) Philosophy Organize as a City to create an extraordinary public service organization by supporting the purpose of each department’s services with the belief: • The City can achieve anything through teamwork, innovation and collective strategy that supports the overall mission of the organization • HPO seeks to build and support an organizational culture where achievements are celebrated, teamwork is elevated, passionate people thrive and we are purpose driven This approach helps achieve the Organizational Vision and ensure we are “a vibrant, compassionate, innovative team.” High Performance will only be achieved through constant focus on building and nurturing an organizational culture that will support the HPO Philosophy. Creating an organizational environment that prioritizes people, problem-solving, service optimization and customer relationships is critical. It involves a holistic approach encompassing culture, organizational structure and team development. 1. CULTURE OF EMPOWERMENT & COLLABORATION • Foster a culture that values and prioritizes people. Ensure employees feel heard, valued and empowered. • Encourage open communication and feedback at all levels. • Recognize and reward achievements to boost morale. • Participate in learning opportunities and training to increase knowledge around diversity, equity and inclusion (DEI), have a growth mindset and embed new learnings and skills into daily business practices. 2. • Implement a systematic problem-solving framework to address challenges efficiently. • Encourage a culture that views problems as opportunities for improvement. • Establish cross-functional problem-solving teams to tackle complex issues. Forward Team, Leadership Forum and Impact Team Model. PROBLEM-SOLVING FRAMEWORK 3. • Regularly assess and optimize service processes to enhance efficiency and quality. • Implement technology solutions to streamline workflows and improve service delivery. • Solicit customer feedback regularly to identify areas for improvement. SERVICE OPTIMIZATION 4. • Develop strong relationships with customers by prioritizing their needs and expectations. • Build capacity for employees in customer service skills and empathy. • Utilize customer feedback to iterate and improve products/services. CUSTOMER-CENTRIC RELATIONSHIPS High Performance Organization -12-
ROCHESTERMN.GOV Budget in Brief 11 6. • Identify and nurture leadership qualities within the organization. • Establish a leadership development program with mentoring, coaching and skillbuilding components (HPO Academy). • Encourage leaders to lead by example, promoting organizational values. LEADERSHIP DEVELOPMENT 7. • Foster collaboration between departments through regular cross-functional meetings. • Implement shared goals that require collaboration between different teams. • Encourage social interactions through team-building activities. INTERDEPARTMENTAL RELATIONSHIPS 8. • Establish a robust communication strategy, utilizing both formal and informal channels. • Implement tools for transparent and accessible communication. • Conduct regular virtual Teammate Town Hall meetings to inform teammates about organizational changes and updates. EFFECTIVE COMMUNICATION 9. • Embrace a culture of continuous improvement where every process, policy and structure is subject to regular review. • Encourage employees to propose improvements and provide constructive feedback. CONTINUOUS IMPROVEMENT 10. • Build an organization that is agile and can adapt to changing conditions. • Promote a flexible work environment that accommodates diverse needs and preferences. FLEXIBILITY & ADAPTABILITY 11. • Prioritize employee well-being by offering wellness programs and mental health support. • Promote a healthy work-life balance to prevent burnout and enhance productivity. WELL-BEING & WORK-LIFE BALANCE 12. • Establish key performance indicators (KPIs) to measure success in each area. • Hold leaders and teams accountable for meeting performance and improvement targets. MEASUREMENT & ACCOUNTABILITY By implementing these strategies, our organization can create an environment that values its people, solves problems effectively, optimizes services and builds strong customer relationships, all while fostering growth and adaptability. The tactics to achieve the cultural outcome will continue to adjust and evolve as we see success and build toward the next level. Forward Together 5. • Periodically review and adapt the organizational structure to align with business goals. • Implement a clear career growth path for teammates, emphasizing skill development and promotions from within. • Provide ongoing development and mentorship programs ORGANIZATIONAL STRUCTURE & CAREER GROWTH -13-
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Honorable Mayor and City Council Members, On behalf of the entire City of Rochester team, it is a privilege to present the recommended 2026-2027 Operating Budget and 2026-2031 Capital Improvement Plan (CIP) budget. This budget is a testament to the discipline of City Teammates and the City Council in remaining committed to our evolving Strategic Priorities and Action Plan items, while also being responsible stewards of our community’s resources. Our strong financial stability continues to enable Rochester to meet today's needs while providing strategic opportunities to invest in resources that help us plan for and be prepared for the future. I am grateful for the feedback and support provided by the Mayor and City Council throughout the strategic planning and budget development process, as this financial forecast was developed to lead Rochester toward addressing the most foundational and pressing needs of our City while advancing priorities that focus on building an inclusive community for all whom we are here to serve. As we present the proposed budget for the upcoming two-year budget forecast, we remain focused on ensuring that every investment aligns with the City’s strategic priorities, delivers meaningful value to our residents, and supports operational investments grounded in financial stewardship for long-term financial and operational sustainability. To that end, our budget decisions are guided by a set of core evaluation principles designed to ensure that new or evolving roles, projects, and services are both purposeful and fiscally responsible. This approach emphasizes six core principles: Strategic Value and Return on Investment, Funding and Financial Sustainability, Resource Efficiency and Adaptability, Collaboration Opportunities, Stakeholder and Organizational Impact, and Accountability and Performance Measurement. These evaluation principles apply to all baseline revenues and expenditures necessary to maintain current service levels, as well as decision packages that introduce new resources to enhance outcomes and services when we have reached capacity or new capacity is required to better serve the community in alignment with foundational principles and strategic priorities that reflect the changing needs of the community, supporting a quality of life that helps our community thrive. -15-
Budget Evaluation Principles Strategic Value and Return on Investment - Each proposed investment has been assessed for its ability to directly advance the City’s key organizational goals and strategic priorities. This includes an evaluation of how well the initiative supports core functions such as community safety, economic development, or operational excellence, and whether it delivers measurable outcomes or revenue-generating opportunities that justify the investment. Funding and Financial Sustainability - The budget reflects a disciplined approach to financial stewardship. We have prioritized initiatives that are supported by sustainable funding sources and have avoided reliance on temporary or uncertain revenues. Longterm financial impacts have been considered, including how each item aligns with broader budget priorities and whether existing responsibilities or roles can be consolidated to reduce costs. Resource Efficiency and Adaptability - Wherever possible, we have identified opportunities to realign or optimize existing staff and resources to meet current needs, refine baseline revenue and expenses. If new roles or expenditures are recommended, we have considered their potential to reduce overtime, increase service efficiency, mitigate future expenses, or alleviate existing workloads to provide better outcomes. In cases of financial constraint, adaptability and scalability have been key considerations. This refinement has provided one-time capacity of approximately $4 million to reduce the projected levy in 2026 by almost half, while still advancing key initiatives through recommended decision packages in a manner that will not result in a significant increase in future years. Collaboration Opportunities - We have sought to enhance interdepartmental coordination by leveraging existing teams, skills, and projects. By avoiding duplication and encouraging cross-functional collaboration, this budget supports a streamlined and integrated approach to City services. Furthermore, it seeks to bridge across the citywide enterprise, utilizing resources that might otherwise be formally reorganized and centralized. This involves initiating more robust cost allocations and continuing to reorganize or reimagine how decentralized work takes place as opportunities present themselves. This reduces the need to add skill sets in each work area and instead brings together like services to combine the varied skill sets of individual teammates, maximizing value as a cohesive team, regardless of their formal reporting structure. Stakeholder and Organizational Impact - Our investment strategy takes into account the impact on residents, staff, and departmental operations. We’ve emphasized initiatives that break down silos, strengthen internal collaboration, and support shared goals. Every recommendation has been made with an eye toward maximizing organizational benefit and long-term community impact. Accountability and Performance Measurement - Finally, we are committed to ensuring that all initiatives include clear metrics for success. Performance will be measured based -16-
on project outcomes, efficiency gains, and alignment with the City’s vision and values. Ongoing evaluation and course correction will ensure that we continue to deliver results, improve transparency, and drive value across the organization. While the creation of metrics is a work in progress, there are qualitative results that we can look to for guidance on whether investments should be continued through additional resource allocation in future years, or whether course correction and reallocation would better serve the community. By viewing the budget as a resource guide with an eye toward longer-term results, with each year building upon the next, we can establish a firmer outlook that provides better stability and a clear path for future decision-making. Commitment to Continuous Improvement Every year throughout the year, the City team strives to foster a culture of cost mitigation and continuous improvement by assessing the needs and demands across all areas of the City to directing the necessary resources to the most pressing needs while not being overly reliant on additional levy funding to accomplish these tasks. These continuous improvements have an impact across the City, and while they do not eliminate the need for tax levies and utility rate increases, they significantly alter the timing and amount of cost escalation while still providing quality service. City operations are constantly being adapted to better serve at the same or lower cost. -17-
This allows us to maximize all our resources before adding additional capacity that requires further investment in new or expanded contracted or personnel resources. Budget Summary Overall, the budget process and recommendations strive to meet the recommended best practices from the National Advisory Council on State and Local Budgeting. This budget is constructed through an almost six-month process considering the following high level financial, operating and policy outcomes: • Incorporates a long-term perspective; • Establishes linkages to broad organizational goals; • Focuses budget decisions on results and outcomes; • Involves and promotes effective communication with stakeholders; and • Provides incentives to government management and employees. In addition to our emphasis on budget evaluation principles, continuous improvement, and strategic investment, this 2026-2027 budget prioritizes funding to support financially sustainable core services and enhance outcomes through targeted resource allocation. The Mayor and City Council’s Foundational Principles, Strategic Priorities, Action Plan, and a longstanding tradition of fiscal responsibility inform the decisions made within this recommended budget document. Through collaborative efforts, we are committed to keeping the property tax levy focused on core services that maximize the objectives outlined in our planning documents, serving our residents, businesses, and visitors. This focus prioritizes various investments in facility maintenance, vehicle and equipment replacement, and staffing to meet and improve upon current service demands while also maintaining responsible practices to assure long-range financial stability. I want to recognize the efforts of Brian Anderson, Aaron Parrish, Rachel Houdek, Josh Duerr, the Leadership Team, the Finance Team, support from IT, and others, and all the departmental budget reviewers who invest significant time in preparing the baseline budget and decision packages, as well as refinements made throughout the budget preparation process. Also, continued appreciation to Tim McCollough and his team from Rochester Public Utilities (RPU) for their ongoing efforts to further integrate RPU with the other City budget timelines, allowing the Mayor, City Council, and community to view a single document containing all City budgets. While we are not at our destination, we have made significant progress during this budget cycle. -18-
Significant Financial Drivers Impacting Levy Change in 2026-2027 The most significant driver of the levy adjustments each year is related to financial support necessary to deliver on the contractual obligations to our personnel. Each year we generally expect at least a 5% shift in the budget to meet contractual labor obligations that are driven by demands in the labor market and obligations necessary in order to continue to provide services to the community. Other demands include inflationary and CPI changes that impact commodities (materials and goods), contractual services, and vehicles/equipment. Other significant impacts in 2026: • Paid Family Medical Leave requirements begin in 2026 - $354,347 in expense was added to account for the state-required benefit. • 2026 and 2027 represent the start of an updated allocation for central services to enterprise funds that benefit from costs associated with programming paid for in the General Fund. Allocations offset a small portion of tax levy that would otherwise subsidize the value to the enterprise fund - $1,091,350 in value in 2026. • Equipment Revolving Fund – In 2026 an additional expense of $1 million was added and in 2027 an additional 5% was added for active assets of $1.6 million in order to properly fund current and future vehicle replacements necessary due to significant inflationary pressures on vehicles, years of low interest returns to the fund, and other structural imbalances. • Payments in Lieu of Property Taxes for 2026 are slightly higher, with a 2% increase for RPU, and adjusted slightly for Stormwater, Wastewater and Parking Funds in alignment with increasing tax levy (although slightly less, at 4% and 2% for 2027). • All departments were requested to thoroughly review their baseline budgets and -19-
approximately $1.86M in reduced expenses and increased revenue were made. These are primarily one-time adjustments that cannot be achieved year over year unless new revenue (fees) are implemented or service levels are reduced, impacting the community. A few examples: o Adjusted annual state payments to new trend levels for Fire and Police training. o Reduced professional services line in Administration. o Changes to benefit elections made by employees during the enrollment cycle reduced the impact of employee benefits on the levy. o Eliminated software expense for performance review module and shifted to other resources to complete process. o Numerous other adjustments were made across all service areas to achieve the reduced levy. • These adjustments allowed for decision packages to be considered, while still reducing the levy from a predicted 10.68% to a recommended 5.9% year over year increase, while still absorbing the cost of financing the City share of the new Parks Maintenance facility. Notably, 2027 marks the first year post-COVID that the Levy has fully reabsorbed the -20-
costs of redeploying personnel that were frozen during the pandemic. In the past, holistic budget stability funds eased the reabsorption of these services, and now the general fund is structurally in balance with ongoing revenue paying for the cost of operations. Finally, there are approximately $1.45 million in personnel-related decision packages and $330,000 in non-personnel-related decision packages that impact the Levy. 2026 recommended new positions focus on: ➢ Arborist to increase tree health and reduce the pruning cycle for boulevard trees ➢ Management Analyst to focus on ADA compliance and accessible government ➢ Formalizing two 10 hour per week Community Connectors to increase engagement in Somali and Spanish speaking communities ➢ Inspector to address new window, roof and siding inspections required by the State. ➢ One System Administrators to address the increasing demand for IT services and need or cybersecurity ➢ Criminal Investigator to address rising needs to prevent and prosecute online child crimes ➢ 311 Customer Service Specialist to provide capacity for supervisor to continue to streamline service and make other organizational process changes to better communicate with and serve callers. ➢ Two part time graphics positions to continue improving community engagement ➢ Additional Community Service Officers (CSO’s) to support hiring and recruitment and address safety and security in parks, particularly with bathrooms and shelters ➢ Additional maintenance specialist to address increased maintenance needs at the new North Maintenance facility that brings together Parks and Public Works ➢ Restoration of City Council travel to 2024 level ➢ Shelter, Restrooms, Playground and Parks Activation ➢ 4 Library Customer Support Assistants, to facilitate shift to full-time staffing and away from some part time staffing through attrition ➢ Reprioritize Existing FTE to Create an AI Implementation Strategist Position In addition, there are $133 thousand in non-Levy funded decision packages recommended for 2026 which align with the Council’s Foundational Principles and Strategic Priorities: -21-
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2027 Decision Packages build on the needs of 2026 with investments that support Geographic Information Systems, additional IT needs with system support specialist, community outreach specialist focused on assisting people experiencing homelessness in PD, an additional arborist FTE, a custodian for the new joint maintenance facility for Parks and Public Works. Most of the projected levy growth sustains and supports our existing portfolio of services. -23-
Of the tax levy decision packages recommended, $58,520 in 2026 and $954,340 in 2027 are for one-time expenses that are not an ongoing operational cost. This means, that once purchased, the baseline budget will be modified in the next year to eliminate the available funding. While there may be a new expense that replaces it, it will not exponentially grow the resource needs of the City, and thereby the reliance on levy. Below is a reflection of the key drivers impacting the levy: Note: “Other” includes increases in Utilities, Software Maintenance. In addition, the projected increases above total more than 5.9% with the additional expenses offset by additional non-levy revenue. -24-
Revenue Summary The City’s budget development process begins with a forecast of non-property tax revenues that support City services and projects. This strategy establishes the revenue foundation early, reducing reliance on the property tax levy and strengthening the structural integrity of our budget practices. By first understanding available resources, we are better positioned to strategically invest in and maintain the service levels our community expects. The property tax levy is critically evaluated to ensure it aligns with both community priorities and the relative growth of the tax base. Our approach ensures that the levy is sustainable and equitable, reflecting both inflationary costs and population-driven service demands. Applying the budget evaluation principles outlined earlier, the City identified sustainable, one-time revenue refinements in levy-funded areas totaling $2.3 million which includes the $757,000 in sustainable reductions made as part of an exercise to lower the projected levy. These adjustments will reduce the projected property tax burden in 2026 and support long-term financial stability. The 2026 Recommended Budget includes $663.85 million in total revenue (inclusive of Rochester Public Utilities), of which $118.2 million is funded by property taxes. While the property tax remains a vital revenue source—accounting for 17.8% of all operating revenue—it is not the only driver of City operations. As illustrated in the graph below, 43% of operating costs are funded through service charges, including RPU, which is funded by ratepayers. RPU’s budget for 2026 is $267.5 million, of which $222.8 million is funded through these charges. Miscellaneous revenues, including Payments in Lieu of Taxes (PILOTs), make up 14% of all operating revenue. These diversified funding sources reflect the City’s commitment to fiscal responsibility while maintaining high-quality core services. 2026 also marks the first year the City conducted a more detailed review of central service cost allocations to special revenue and enterprise funds for expenses historically carried within levy-funded budgets. As a result of this refined methodology, $1.1 million in costs—previously absorbed by the property tax levy—will now be appropriately distributed to the funds and services that generate them. This shift reduces the reliance on the levy in both 2026 and 2027. To ensure operational stability across all impacted service areas, the City has chosen to phase in these cost allocations over the two-year budget cycle, helping to smooth the impact on non-levy-funded funds and maintain service continuity. -25-
Local Government Aid (LGA) allocated to operations remains flat at $3.9 million, unchanged from 2025. As a result, Rochester taxpayers and ratepayers will fund a greater share of operating costs in 2026. The City continues to face long-term uncertainty due to the State’s LGA formula, which remains unfavorable to Rochester and projects future declines. Accordingly, the increase in LGA provided by the State in 2024 continues to be allocated toward capital projects—where the funding can be timed and absorbed more effectively than in ongoing operations. In addition, tax levy is relied upon to fund core operating functions as shown in the chart below. Police, Fire, Public Works, and the Public Library all rely on levy dollars to cover 85% or more of their respective budgets, highlighting the importance of maintaining levy support for these core services to maintain high service levels. -26-
Another significant component of revenue necessary to support the services for which they are charged is the utility rates. • The current sewer rates are adopted from 2022 through 2027, per the rate study process and approval from 2021. Rate increases are approximately 1% annually for wastewater utility customers in 2026 and 2027. Wastewater connection fees increase at approximately 2.7% annually and are related to projected inflation and the increased cost of wastewater treatment plant infrastructure. • The recommended Water Utility budget anticipates a 9% general rate change in both 2026 and 2027. Each customer class rate may vary up to 2% based on the 2023 cost-of-service study. The impact to an average residential water customer is $2.01 per month. • The recommended Electric Utility budget anticipates a 6% general rate change in both 2026 and 2027. Each customer class rate may vary up to 2% based on the 2023 cost-of-service study. The cost impact to the average customer is $5.78 per month. -27-
Property Taxes, Growth, and Strategic Investment How tax capacity and levy decisions align with service needs and long-term sustainability The City of Rochester’s property tax accounts for roughly one-third of a typical local taxpayer’s total bill, with the remaining shares paid to Olmsted County, Rochester Public Schools, and the State of Minnesota. The recommended 2026 budget includes a total levy of $118.2 million, which represents a 5.9% increase over 2025. This change reflects the total tax amount collected, not an increase in the tax rate itself. The total levy is first distributed based on the value of new construction, with the remainder absorbed by existing properties. How much each property pays depends on its classification (e.g., residential, commercial, industrial, apartment, agricultural) and the extent to which its assessed value has changed compared to other properties in the same tax classification. Further, when one tax classification increases disproportionately to another in a tax year, that classification of tax absorbs more of the total tax, reducing the overall distribution to the other tax classifications. Likewise, properties with a larger proportionate value increase absorb more of the levy – whether the total amount levied increases, decreases or stays the same. As shown in the charts, Rochester’s tax rate remains within the 10-year average—around 50%—even after several years of decline. At the same time, both tax capacity and the property tax levy have grown, largely due to increased assessed values and new construction, helping to mitigate cost impacts on existing taxpayers. Between 2014 and 2026, tax capacity has grown by an average of 7.29% per year, while -28-
the average annual increase in actual property taxes levied has been 7.25%. This demonstrates that the City has remained disciplined and consistent in its approach, balancing community needs while limiting the tax burden. Even though property taxes account for just 17.8% of total City revenues, they remain the most visible and discussed revenue source, supporting core City services like police, fire, public works, parks, community development, the library, and administrative functions. The General Fund relies heavily on property tax revenue to maintain these services. Additional departmental services and the evolving needs of the community dictate that the City evaluate its service levels regularly to both assess the strategic priorities as well as adjust those priorities based on the changing service needs while also maintaining the strategic investment strategy to sustain itself long term and not to the detriment of the taxpayers. Strategic Investments in Equipment and Facilities To address long-standing needs in vehicle and equipment replacement across departments, the 2026 budget allocates $1.1 million to the City’s Equipment Revolving Fund. In addition: • A 10% charge on fully depreciated equipment implemented in 2025, adding $454,889 in levy funding for 2026, along with modest increases from enterprise funds. -29-
• In 2027, a 5% charge on active equipment will be added, requiring an additional $1.6 million in levy support. • These steps will help correct years of underfunding and avoid higher future replacement costs. Building Long-Term Operational Capacity To prepare for operational growth and increased demand: • The 2026 and 2027 budgets include funding to support staffing, operations, and debt service for the new Parks and Recreation Maintenance Facility. • Payment In Lieu of Taxes (PILOT) transfers from enterprise funds to the General Fund will continue under existing formulas. • Rate adjustments of 4% in 2026 and 2% in 2027 are proposed for stormwater, parking, and sewer enterprise funds to keep pace with service and infrastructure demands. Tourism Revenues and Civic Infrastructure As Rochester continues to attract visitors, projected increases in hotel/motel tax revenues will be directed to the Facilities and Maintenance Fund. This strategic use of tourism revenue helps prepare for future major capital investments—especially at the Mayo Civic Center—and reduces reliance on the tax levy for such projects. -30-
All Fund Summary To fund all recommended expenditures, Table 1 provides the detail of the proposed 2026 and 2027 Major City Revenues. For comparison, the 2025 Adopted Budget revenues are also provided. The trends show stability and some growth across a variety of revenue sources. This year, we are phasing in central service cost allocations to non-levy funded operations to account for services utilized primarily by enterprise funds that are expensed in the General Fund. For example, a small cost allocation for administration, finance, and HR services, as well as other costs as appropriate by the enterprise fund. The goal is to ensure that the tax levy isn’t overly burdened to provide services that benefit the service areas intended to be paid for with charges paid by ratepayers. As you can see, hotel/motel tax is anticipated to increase and be dedicated to operational and capital funding for the Civic Center Complex, as well as a small opportunity fund to invest in destination marketing or other programs that will focus on increasing tourist business activity and visitor spending. Inspection permit revenue is projected to increase, in part due to the City adding roofing, window and siding inspections and a related position. The majority of the revenue increase is related to permit fees for Bold Forward Unbound, with anticipated permits being lower in 2027 based on the timing of the project. The Bold Forward Unbound permit revenue and related expenses are held in a specific CIP project and business unit and tracked to ensure that over time the related positions sunset, or future decisions are made about whether to retain similar or different positions necessary at that time. Payments in lieu are made from utility funds that offset general fund costs and account for what would have been levied if the utilities were private. These payments increase slightly based on an annual adjustment. Finally, we see that parking ramp, fines and parking lot revenue is starting to normalize relative to corresponding utilization increases. -31-
Expenditure Summary The total 2026 recommended (including RPU) budget is $663.85 million which includes all operating and CIP expenditures. The recommended budget is compared to the City Council’s 2025 adopted budget to show where changes have occurred in the operating, CIP, and debt service portions of the budget. Note that RPU’s budget fluctuates due to the nature of the electric and to a lesser extent water utility and should be considered a snapshot comparison. It should be noted that Rochester Public Utilities (RPU) is operating in a dynamic and rapidly evolving energy landscape shaped by shifting federal policy, growing electric load growth and broad inflationary pressures, and changing dynamics in regional energy markets. Despite this complexity, their planning and continuous updates to financial and resource planning models has positioned RPU and the City to respond decisively and maintain momentum toward the community’s long-term energy goals. Therefore, unlike most years, it is possible that there will be significant adjustments to their forecast either before final budget adoption in December 2025, or with an amendment in early 2026. -32-
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